A common legal structure employed for property developments is the Limited Partnership (LP). These entities provide benefits from both the company and partnership legal structures.
In this blog we seek to provide a brief overview of what a LP is and how they are of benefit to property developers.
What is a Limited Partnership?
Limited Partnerships (LP’s) are governed by the Limited Partnership Act 2008 and are a separate legal entity. They are registered on the companies office and must finish their name with ‘Limited Partnership’ or the abbreviation ‘LP’.
LP’s consist of a General Partner(s) (GP) and Limited Partner(s) and must have at least one of each. Each can either be a company or individual but cannot be the same person (they can be related parties). The entity has a separate legal status from it’s limited partners and is in this way similar to a company and its shareholders.
The GP’s responsibility is to manage the Limited Partnership and is jointly and severally liable for its debts. There may be more than one General Partner in a Limited Partnership and it isn’t required for these partners to make any contribution (equity) to the partnership. The Limited Partners are the investors into the partnership contributing the capital (equity), however, do not take any role in it’s management (this is done solely by the General Partner(s)). All partners details must be registered, however, only the General Partners details must be made public.
Each LP must have a Limited Partnership Agreement in place which details how the Limited Partnership will be managed. The Agreement is required to contain the following at a minimum;
- Details on any restrictions on a limited partners right to assign or dispose of their partnership interest.
- Any restriction on the business or other activities which the Limited Partnership can undertake.
- Whether the General Partner can compete with the Limited Partnership
- Each limited partners entitlement to distributions.
- How a limited partner can leave the Limited Partnership
- When and how the Limited Partnership will terminate.
- Whether or not the Limited Partnership has a conflict of interest policy.
The agreement can be amended at any time providing it follows the procedures contained within it. The agreement does not need to be registered and therefore can remain confidential between the partners within it.
Why would I use a Limited Partnership for Property Development
We have provided a detailed list below of the advantages of a Limited Partnership with property development. The primary function of a Limited Partnership for property development, however, is where external capital is being raised for a development and those parties wish to partake in the economic interest of the development whilst limiting their liability. It is quite common for joint ventures or instances where a third party investor will invest in a project.
What are the advantages of a Limited Partnership
The main advantage of a Limited Partnership is that it limits the liability for the limited partner as stated above. The limited partner will typically not provide any personal guarantees to a funder and the liability is normally limited to the general partner.
Further, the identity of the limited partner is confidential. There is no requirement under law for the limited partner to be on the Register of Limited Partnerships, the only information on the register is the name of the LP, it’s date of registration, address and the details of it’s general partners, nothing about the limited partners. This can be attractive for a high net worth investor who is seeking an economic interest in a project without people being publicly aware.
A Limited Partnership still functions as a partnership meaning that all profits and losses flow through to the partners (including limited partners). This doesn’t necessarily create liability for the limited partner, however, may provide some tax benefits to the entity.
The requirement for the limited partner to have no control in the partnership can be appealing to both the general partner and the limited partner. From the limited partnership point of view it means that the investment is almost entirely hands off and for the general partner, who tends to be the entity or individual that has set up the development, retains control. This is a crucial mechanism to limiting the limited partners liability. If they are found to have made decisions or exercised a level of control in the LP then they may be open to liability.
There is also no requirement for the LP to prepare or have financial statements audited. Despite this, limited partners who have contributed 5% or more of the total capital contributions can give written notice requiring the LP to prepare financial statements to distribute.
How can I set up a Limited Partnership
These are best established by an experienced law firm. Most property or commercial law firms will be able to assist (note this is more than a basic conveyancing lawyer). It is crucial that the partnership is established properly and all provisions under the act are appropriately followed.
It is important to note that an interest in a Limited Partnership is considered to be a financial product under the Financial Markets Conduct Act 2013 (FMCA) and therefore disclosure provisions from this act are required. These include the need to provide investors with a Product Disclosure Statement (PDS).
It is common for investors in a LP to be restricted to wholesale or eligible investors which mean there are exemptions within the FMCA thus simplifying the regulation and reducing risk. As above, however, we recommend seeking expert legal advice to ensure you do not fall foul of the law.
You should also place some consideration into how the General Partner is set up. If this is a company with multiple shareholders you may, as is best practice, want to ensure a shareholders agreement is established to provide guidelines on governance and operation of the general partner.
If you have a project with external investors and you are thinking about your structure considering a Limited Partnership is a must do. And like setting that up, when looking for funding on the project get some expert advice from the team at Lateral Partners.
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